Some of the biggest names in finance are warning that the government’s plan to return Fannie Mae and Freddie Mac to private ownership risks disrupting a market critical to the U.S. housing system.
The investors, including BlackRock Inc., Fidelity Investments and Pacific Investment Management Co., have told the Trump administration that any move to privatize Fannie and Freddie should include an explicit guarantee of the $5 trillion in mortgage-backed securities they issue, which only Congress can provide, according to people familiar with the matter. The Trump administration, by contrast, says it is willing to move forward without such a guarantee, arguing that it is past time for the government to reduce its role in housing.
“The structure and significance of the guarantee remains a sticking point given its centrality to the discussion,” said Isaac Boltansky of Compass Point Research & Trading, which serves large, institutional investors. “The guarantee itself means not only deeper, more liquid markets but also cheaper borrowing costs for consumers.”
To prevent a collapse of the mortgage-finance giants during the 2008 financial crisis, the U.S. government agreed to absorb unlimited losses at the companies and ultimately provided nearly $190 billion in taxpayer money.
Eleven years later, the Trump administration has outlined plans to put the companies back into private hands — and the way in which taxpayers could be on the hook to bail out the institutions has emerged as a stumbling block.
Fannie and Freddie buy mortgages from lenders, package them into securities sold to investors and provide guarantees to those investors in the event of default. This role has helped preserve America’s popular 30-year, fixed-rate mortgage — something few other countries have.
But there is a downside. The arrangement gives the mortgage-finance companies special market advantages that could encourage them to take on risky loans on the assumption that they would be bailed out by taxpayers in the event of a crisis — a phenomenon known as moral hazard.
Concern about Fannie and Freddie’s future prompted a White House meeting this summer with buyers of the companies’ debt, including BlackRock, Fidelity, Bank of America Corp. and Nomura Holdings Inc. The gathering around a conference table with staff from the National Economic Council, not previously reported, was organized by the Securities Industry and Financial Markets Association, a Wall Street industry group, according to the people familiar with the matter.
The companies’ federal regulator is working on a plan that could reduce the size of Fannie and Freddie and require them to hold more than $180 billion of capital to absorb possible losses — a multiyear process likely to culminate in the raising tens of billions in cash through public offerings.
Though the administration says it wants Congress to act on a sweeping remake of housing finance, it is laying the groundwork to privatize the firms even if Congress is unable to agree on legislation. The administration has said it could support a federal guarantee for Fannie and Freddie securities, but it warned that action to end the companies’ conservatorships couldn’t wait indefinitely.
“Indefinite limbo” isn’t an option for Fannie and Freddie, said Mark Calabria, the head of the Federal Housing Finance Agency, the companies’ independent federal regulator. “My obligation…is to get them out” of conservatorship, he told reporters at a mortgage bankers’ conference in Austin, Texas, last month.
At present, Fannie and Freddie’s securities don’t have an explicit guarantee, but the companies can tap a $250 billion Treasury line of credit in an emergency. In the absence of a congressional guarantee, the administration proposes to maintain a version of the existing Treasury backstop. Large investors in their securities say that support would be insufficient once the firms leave government control.
A Treasury backstop “could be withdrawn by future administrations, which is not equivalent in either magnitude or stability with a legislated, explicit guarantee,” Kent Smith, Pimco’s executive vice president and portfolio manager, said in a statement. Pimco, among the biggest buyers of Fannie and Freddie’s securities, supports keeping the companies under government control if Congress fails to act — as appears likely.
The issue is unlikely to be resolved soon. Thorny policy details remain to be decided, such as how much capital the firms must maintain after they leave government control and how to dispose of the government’s massive stakes in the firms.
Ken Bentsen, president and chief executive of Sifma, said the administration “can and should” take steps to prepare Fannie and Freddie to exit conservatorship. But allowing them to leave government control without an explicit guarantee would sour investors on their securities, which in turn would likely increase mortgage costs.
“We don’t want an exit from conservatorship without Congress because of the market impact,” he said.
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